In this guide we will explain what bad credit is, and how to get yourself prepared before applying for a bad credit mortgage.
Whether you think you have some small credit issues, or you know you have some serious ones, it will always be a good idea to seek out some experienced advice.
Understanding what has happened with a past loan application is not always straightforward, and as the debt situation increases it then involves more legal actions, jargon and added costs.
Whether you are considering moving home, or remortgaging, keep reading, as we explain bad credit and mortgages.
What exactly is bad credit?
When you take out any type of credit agreement, you will sign to say that you will abide by the terms and conditions and always make your payments on time.
When you apply for credit, these companies will use a Credit Reference Agency (CRA) to search your previous loan accounts to see how you have managed your finances. In the future they may also share back to the CRA, information about your payments on the loan you are applying for.
Deviations from what the finance company are expecting could be classified as bad credit. This is because late payments, or arrears, for example, will be registered onto your credit file as negative markers, for others to see.
Bad credit, poor credit or adverse credit comes in all shapes and sizes. From missed mobile phone payments and unauthorised overdrafts to CCJ’s and bankruptcy.
There are different levels of severity when looking at credit, and these levels will impact your credit score in various ways.
It’s hard to know if you have bad credit, but one way is to get hold of a copy of your credit report. Then you can see all of the entries against your name.
What are the main causes?
There are several factors that can either lower your credit score or be perceived as bad credit, regardless of which credit rating agency you look at.
These could include:
Not keeping to the terms of previous credit agreements: Imagine signing up for a personal loan but failing to make the agreed monthly repayments. Making late repayments can cast negative markers on your credit rating.
Making only minimum repayments: If you find yourself constantly paying off the bare minimum on your credit cards, it can be seen as an indication that you struggle to manage your money and pay off debts. This behaviour can have a detrimental effect on your credit rating.
Mortgage or rent arrears: If you want to apply for a new mortgage then these are to be avoided.
Payday Loans: Payday loans are expensive and many people find themselves refinancing several times during the course of a year. This will have a detrimental affect on you score.
Defaults: If you have faced credit challenges in the past and ended up with defaults, an Individual Voluntary Arrangement or a County Court Judgement against you, it will significantly harm your credit rating.
The most severe situations involve unpaid debts, which could then progress to IVAs or even bankruptcy.
Lack of credit history: While it may seem advantageous to have no debt in your past, the absence of a borrowing history means there is no evidence for lenders to look at. This is known as having a thin credit file.
Can You Get a Mortgage with No Credit History? – This will depend on your income, deposit and affordability. Read more.
What is a bad credit mortgage?
There isn’t an actual product called a bad credit mortgage.
The name refers to specialist lenders who are better prepared (and willing) to help these types of borrowers. They have previous experience of arranging adverse credit loans and can see past the bad credit label.
These mortgages are more expensive, and they are assessed on a case by case basis. Lenders will take into consideration the type, age and severity of any bad credit when making their decisions. You will be offered the opportunity to provide some background surrounding the credit issues to help explain what happened and why.
How do they work?
The structure of a bad credit mortgage is just the same as a regular mortgage. There will just be more stringent criteria and underwriting in place to qualify and be approved.
So you will have some choice over:
Repayment method: Repayment or interest only
Interest rate: Fixed, tracker etc
Mortgage term: 10-40 years
The specific options available will depend on the lender and your own personal financial situation. If you need a higher loan to value then you may find that some of the options are restricted.
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Can you get a mortgage with bad credit?
Having any kind of bad credit registered against you can mean that the main ‘high street’ lenders will be unable to help. They have very strict requirements, and some don’t accept any borrowers that have experienced past credit issues.
Fortunately there are lenders, and brokers, who are less rigid and more understanding.
Getting a subprime mortgage with bad credit involves assessing your overall credit/debt situation.
- What type of issues?
- How long ago?
- How much for?
It is undoubtedly more difficult to get a mortgage with a less than perfect credit report, even when two people apply for a joint mortgage.
But there are several lenders that could help you.
To give yourself the best opportunity, always work with a whole of market mortgage broker. These specialists will have access to the widest number of lenders, including those offering adverse credit products.
You should also allow yourself some time to get mortgage ready, get your paperwork and finances in the best possible shape.
Can you get a mortgage with a CCJ?
Having a CCJ registered against you will put off quite a few lenders straightaway. The mere mention of a County Court Judgement will have them running in the opposite direction. While they may tolerate a lower credit score, or some late payments, a CCJ is not acceptable.
But fortunately there are other lenders who will take a more positive approach. You will obviously need to meet the other eligibility criteria and having a decent deposit (min 10%) will open up a few doors for you.
With regards to the CCJs themselves, many of these lenders will prefer them to be registered at least three years ago. Having a more recent CCJ on your credit file, or perhaps multiple CCJs, will restrict the number of lenders available to you.
Payday loans
Providing that you have kept up with the repayments, having a payday loan does not mean you have bad credit. However, there are quite a few lenders that do not want to see these types of loans on your credit file. It will therefore limit your choice of lenders. Read more.
What about defaults?
Your ability to secure a mortgage with defaults showing on your credit file will depend on how long ago it happened and the type of credit agreement affected.
There will always be lenders that take a zero tolerance approach, and will not accept any type of default, or CCJ. But the lenders that are more understanding of a borrowers credit issues will want to understand how and why it happened. Satisfied defaults are less troublesome that unsatisfied ones, because you managed to rectify the situation.
Entries that relate to mobile phone contracts, will have less of an impact than those for mortgage or secured loan payments.
Debt Management Plans (DMP)
Mortgage options are generally available, even with a Debt Management Plan in place.
As with all bad credit problems, how a lender reacts will be affected by how long ago it happened, how much it was for and the type of credit agreement involved.
If you’ve had your DMP for a while and have kept up with the payments, you should be classed as a lower risk borrower. You have shown that you can maintain the agreed terms and regular payments. However, plans started within the last six months will make finding a mortgage option that much harder.
Your Debt Management Plan payments will affect how much you can borrow, even though you may never have missed a payment. These will be deducted from your income before any multiples are used to calculate a potential mortgage amount.
How does an IVA affect mortgages?
An IVA is a legal binding contract that provides protection for debts that have become difficult to pay back and typically will last for five years and involves making regular monthly payments towards your debts.
During the IVA period you won’t have the ability to take out further large credit agreements, which includes a mortgage. Lenders won’t want to see a ‘live’ individual voluntary arrangement showing on your credit report. So wherever possible, only apply for a mortgage once the IVA has been repaid or when it drops off your credit file. Your IVA will appear on your credit report for six years from the date it was approved.
If your circumstances are such that a new mortgage really is needed then you will need prior approval from your Insolvency Practitioner (IP). It’s a good idea to speak with a mortgage broker at the same time, to assess what might be possible.
What about bankruptcy?
If you’ve been discharged from bankruptcy, getting a mortgage should be possible.
The length of time that has passed will influence how many lenders would be able to help you. If it’s less than six months then there are solutions but these could come with higher interest rates. But after 2 or 3 years the number of approachable lenders will increase, so you will have access to a wider range of deals.
Bankruptcy rules mean that you cannot apply for a mortgage until you have been officially discharged.
Can you remortgage to a new lender?
Whether you are seeking a mortgage to move home, or to remortgage, there are similar options available.
Both options will require you to pass a credit check and affordability assessments. You will also need to supply documents and be within the lenders loan to value range.
An alternative to remortgaging is a Mortgage Product Transfer. This is where you choose a new interest rate deal, but stay with your current lender.
What about debt consolidation?
Remortgaging over to a new lender may give you the opportunity to borrow more money, and this could be used to pay off other unsecured debts such as; personal loans, credit cards, car finance etc.
This is known as a Debt Consolidation Remortgage.
The end result is that you will have a bigger mortgage, but overall your monthly outgoings will have reduced. Remortgaging to consolidate debt, whilst having bad credit does pose a few challenges.
And debt consolidation isn’t right for everyone.
Before making any decisions, speak with an independent mortgage broker. They can explain the pros and cons, and give you an idea of what mortgages you might be eligible for.
Documentation
There’s always lots of different paperwork needed when you apply for any mortgage.
To begin, here’s the basic info required:
- Photo ID (passport or driver’s licence)
- Proof of address (recent bank statement or council tax bill etc)
- Proof of earnings (recent payslips or SA302’s, accounts etc)
- Recent bank statements (usually last 3-6 months)
- Proof of deposit (bank statement)
You will then need to provide some additional info regarding the bad credit.
The more severe the problems, the more documents and information you will be asked for.
- Explanation as to why the bad credit occurred
- Perhaps copies of agreements/letters
- Relevant dates
- Explanation of how this has been resolved
- Older bank statements
Your mortgage broker will ask to see a copy of your credit report, before they start work on locating you a new mortgage.
Get a copy from each of the three main Credit Reference Agencies, as you won’t know which one a certain lender will use.
How do you know if you have bad credit?
For some people, the first time they realise something could be wrong is if they get refused credit or a mortgage. Understandably, this can be a surprise if you are not aware of any previous payment or debt problems.
If this happens, you may be able to get some basic information from the loan company.
You should then apply to get a copy of your credit report. Then you will be able to see what’s causing the problems.
DO NOT KEEP APPLYING FOR CREDIT WITH DIFFERENT COMPANIES.
This makes the whole situation much worse.
Checking your own credit report won’t affect your credit score. If you see any errors, or wish to dispute an entry, you should contact the credit agency. Take a look at what credit score you are given and make sure everything looks OK, including being registered on the electoral register.
CONTACT A MORTGAGE BROKER
If you are ready to take the next step then we can put you in touch with a fully qualified independent mortgage broker.
Are the mortgages more expensive?
Because you already have some past credit issues, lenders will be cautious in their approach.
They may want to help but they also need to check that you have the ability to keep up with their monthly payments, and not fall into arrears.
Depending on the severity of your bad credit, you may be classed as a ‘higher risk’ borrower. If this happens then you are likely to be charged a higher rate of interest than someone who has a clean credit file.
The good news is that your situation will improve with time as the bad credit entries ‘age’. And your credit file only holds information over the last six years.
So perhaps in a few years time you could remortgage onto a lower risk deal, which will be cheaper.
Deposits
All mortgage lenders will require borrowers to have a deposit.
If you are buying a house, then this could be cash and/or equity. If you are remortgaging, it could be just the equity you have built up.
The deposit affects the loan to value percentage, or LTV. This is the proportion of the property value that is financed by the lender. For applicants with a good credit history, the minimum deposit required would be 5-10%.
For situations that involve poor credit, the lender will ask for at least 10%, more where there is substantial debt issues.
Providers who offer bad credit mortgages tend to work on a case-by-case basis. You will have to explain your credit issues, but if you can demonstrate the loan is affordable, you could still get approved.
How a broker can help
Mortgage brokers are experts at arranging mortgages.
A whole of market mortgage broker will have access to over 100 different lenders, many of these will only deal with brokers.
When you have bad credit, it’s important not to keep applying with different lenders. Each time you do this will lower your credit score.
You need to take a good look at your credit file and understand what is there and why.
The next step is to find lenders that will accept people in your situation. That’s quite a task to undertake.
An experienced mortgage broker will know what to look out for, and which lenders are amenable.
They can sift through hundreds of different deals, ensuring you are offered the best one for you.
And then your broker will help with the application form and assist with getting all of the various documents together.
After the application has been made, they will stay on top of things, and help with queries or questions as they arise.
Respect Mortgages works with one of the UK’s biggest independent mortgage brokers. Click the button below to get started, or call us on 0330 030 5050.
HELP WITH DEBT
If you find yourself struggling with debt, it’s essential to reach out for assistance and guidance. The good news is that there are numerous resources and organisations available in the UK that can provide you with the support you need. Here are some suggestions on where to seek debt advice:
Citizens Advice is a trusted organisation offering free, impartial advice on a wide range of issues, including debt management.
Their trained advisors can help you understand your rights, provide budgeting advice, and explore debt repayment options. You can contact Citizens Advice through their website, over the phone, or by visiting one of their local branches.
StepChange is the UK’s leading debt charity, providing expert debt advice and practical solutions.
They offer tailored debt management plans, debt consolidation advice, and can negotiate with creditors on your behalf. StepChange’s helpline is open seven days a week, and their online tools and resources can help you assess your financial situation and find the best way forward.
National Debtline is a free helpline offering confidential advice on debt and money management.
Their expert advisors can provide guidance on dealing with creditors, negotiating affordable repayment plans, and legal rights concerning debt. You can reach National Debtline by phone or access their online resources, including sample letters and budgeting tools.
Money Helper is a government backed service that provides free and impartial advice on managing money and debt.
They offer online resources, including debt advice tools, budgeting calculators, and information on various debt solutions. Their website is a valuable source of information and can help you make informed decisions about your finances.
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